John Gutfreund's leadership failures during the Salomon Brothers scandal

Leadership Movement/Issues

Leadership Moment Summary

Treasuries trader, Paul Mozer, was a known serial abuser of federal auction rules, corporate policies at Salamon, as well as abuse of customer trust. Upon discovery of these facts, the company's chairman and chief executive officer, John Gutfreund, had numerous immediate decisions to make:

How was he going to discipline Mozer, one of the company's supposed superstars?

What was he going to do to fully understand the full scope of Mozer's fraud and abuse?

What actions should he take to make sure that the situation at Salomon would never happen again?

Who at Salomon should he notify and what should he tell them?

Should he notify the Federal Reserve Bank?

Should he accept responsibility and issue a public apology?

Yet, rather than making any of these decisions, Gutfreund chose to look the other way. Upon learning of Mozer's transgressions, Gutfreund allowed him to remain an employee and did absolutely nothing to discipline him. Gutfreund took no corrective actions to prevent additional fraud, did nothing to investigate the situation more thoroughly to understand its full ramifications and did not report Mozer's actions to internal Salomon stakeholders such as legal counsel and directors. Even as these parties became aware of the situation, Gutfreund hid information he had received from the Federal Reserve Bank of New York and his legal staff that would have let everyone know just how serious the situation had become. Because he delayed contact with the Federal Reserve Bank until he absolutely had no other choice, Gutfruend was perceived as trying to cover up the situation. Further, he never accepted responsibility and never issued a sincere public apology demonstrating that he was truly sorry the situation had ever happened.

II. Key Leadership Issues

For the most part, Gutfreund was not an effective leader. He tolerated deceit, created a culture that encouraged excessive behavior, and failed to follow through on a number of important matters. He shunned transparency and encouraged trader excesses through lavish bonuses. Further, Gutfreund did not accept responsibility for his shortcomings even after the Mozer incident created a crisis for Salomon and had never been much of a strategic leader with a long-term vision.

A. Lack of Integrity

There is a common theme among experts who have researched leadership; integrity is the most important of all the qualities a leader must possess and leaders must act with integrity at all times (Cunningham, 2002). In any organization, workers immediately detect the integrity level of their leaders. Employees observe leader actions and consistency in upholding ethical standards against the temptation of personal or financial gain. Employees tend to respect and galvanize around those leaders who show a high level of integrity and ethical commitment. As a result, despite a leader's position on the corporate ladder, integrity determines effectiveness and the ability to influence and inspire others to achieve organizational goals and objectives.

Gutfreund lacked integrity because he did nothing when confronted with unethical conduct. Sure, he said he believed in running businesses in a clean and exemplary fashion and his acquaintances found it difficult to believe he would be the type of person that would authorize or allow transgressions. but, his actions show otherwise when he tolerated Mozer's conduct. Mozer might have been the first big scandal at the company, but imagine if the Federal Reserve Bank detection had happened even later. Mozer would surely have continued his behavior which would have sent a signal to other employees that the company was willing to look the other way.

B. Flawed Corporate Culture

Corporate culture is defined as the total sum of the values, customs, traditions and meanings that make a company unique. Corporate culture is important because if shapes the values that influence the ethical standards within a corporation, as well as employee behavior (Montana and Charnov (2008). According to these authors, corporate culture is often called "the character of an organization" since it embodies the vision of the company's leaders.

Gutfreund created a flawed corporate culture. His formula for success was to wake up every day "ready to bite the ass off a bear." As such, he created a culture where excessive risk taking as well as a short-term vision of profit making vs. longer-term stability. Everyone at Salomon was trying to up the ante in their bid to be the biggest winner. For example, in response to the $1 million bet proposal from Gutfreund in their game of Liar's Poker, Meriwether responding by saying "if we're going to play for those kinds of numbers, I'd rather play for real money. Ten million dollars. No tears." Further, Gutfreund's arrogance and bravado were noted as conducive to the company's focus on money and power and perhaps the perception that cheaters win. but, this wasn't the case at Salomon where it received only a 3% gain from the improper Warburg bid.

C. Indecisive Management Style

In a difficult environment, leaders are expected to drive change and to lead their organizations out of the undesiriable sitautions (Subramanian, 2009). To do his, according to this author, leaders need to make decisions and quickly act on them. Conversely, poor leaders defer making decisions till they become inevitable, and probably ineffective too. This statement describes Gutfreund to a tee.

Gutfruend himself owned up to the fact that he was "not the most decisive" manager. His inaction allowed Mozer to continue business as usual. Gutfruend knew that he should have a meeting with Corrigan, but never found the time to do so. The suspension of Mozer at the end of April would have prevented the more serious violation in May. and, if he had immediately notified the Federal Reserve Bank of the situation, he would not have been accused of orchestrating a cover up. Even though Gutfreund realized that risk management and legal compliance were important, he never took meaningful action to implement policies and organizational structures that would have supported them.

D. Lack of Transparency

Transparent leadership is a method whereby the leader models the desired behaviors and adopts a position of openness regarding his strengths and weaknesses in achieving them by purposefully drawing attention to his own motives and performance for the edification of others. (Prosch). Purposefulness involves intentional self-examination on the part of the leader and regular disclosure to others regarding what is found, both good and bad (Prosch).

The case reveals that secrecy and exclusion were Gutfruend's favorite management tools. He was known for making decisions in private with his inner circle of executives, only informing committees and board members well after the fact. Most disturbing, Gutfreund hid the fact that he had received a letter from the Federal Reserve Bank of New York from his board. The letter should have been disclosed because it questions the Fed's continuing business relationship with Salomon and demanded a detailed accounting of issues in question within ten days. This would snowball into the Reserve Bank believing that the company's directors were colluding with Salomon's management team.

E. Questionable Reward System

Reward power rests on the ability of a leader to give some sort of reward to employees. A reward system is considered a major source of executive power because it gives the leader the ability to give followers compensation for their compliance (Leadership styles and bases of power). However, "when organizations rely too rigidly on rewards, the system can backfire. Employees may be tempted to unethically or even illegally meet the quotas to which overly rigid reward systems may be tied" (Leadership styles and bases of power).

Salomon relied heavily on a bonus system for its traders that involved multi-million payouts that no doubt tempted traders to behave unethically. These bonuses encouraged greed. Mozer had seen a bond arbitrage trade receive a $23 million bonus which made him view his $4.75 million bonus as only a drop in the bucket of what he could make if he could illegally dominate the government securities market. When profits plunged, Gutfruend actually increased the available bonus pool, no doubt sending a mixed message that the bonuses were to increase profits rather than to reward performance.

F. Accountability

Leader accountability is: "(a) the leader's willing acceptance of the responsibilities inherent in the leadership position to serve the well-being of the organization; (b) the implicit or explicit expectation that the he/she will be publicly linked to his/her actions, words, or reactions; and (c) the expectation that the leader may be called on to explain his or her beliefs, decisions, commitments, or actions to constituents" (Winston, 2005).

Across all three measures defined by Winston (2005), Gutfruend fell short. He did not embrace his leadership responsibilities. Because Mozer was a managing director, Gutfreund was the only person who could fire him. Yet, Gutfreund somehow presumed that others would take care of the Mozer situation. Gutfreund did not expected that he would eventually be linked to his actions and continued to try to hide the gravity of the situation from Salomon's board. Instead of explaining his conduct to the public, Gutfreund would simply say, "No apologies to anyone for anything."

G. Lack of Strategic Vision

A strategic vision defines the desired or intended future state of an organization or enterprise in terms of its fundamental objective and/or strategic direction. It represents a long-term view of how things should be. Without a strategic vision, a company may achieve short-term tactical success, but is likely to struggle in the long-term (Greenfield, 2000).

Indeed, Salomon had been successful for many years as Gutfreund assumed the role of "senior statesman and public spokesman" for the bank. As such, his focus was constantly changing. He was rarely at headquarters due to his frequent international travel to support the company's growing investment banking business. A more strategic focus would have realized the importance of compliance in the financial services industry that demands strict adherence to the letter of the law and the company would have responded through the creation of a vision that embraced corporate ethics. This vision would have then been reinforced with appropriate policies and organizational structure.

IV. Personal Statement

From reading the Leadership Moment, I've learned a lot about my own leadership traits. I believe the area where I would struggle with the most is creating a culture other than one of short-term profits and unacceptable risk taking, especially in the investment banking industry which seems to thrive on these very attributes. I also do not fully understand how to create an appropriate reward system for traders that would not encourage undesirable behavior. This appears to be standard practice and I am not aware of alternatives. However, unlike Gutfreund, I believe that I would have realized that decisiveness, transparency and responsibility are part of the leader's job description. Therefore, with my lack of knowledge of culture and reward systems, I believe it's entirely possible that I would have had to deal with a similar situation as the one Gutfreund had to confront. but, I believe I would have had a far more favorable outcome because I would have taken immediate action to do the right things such as terminating Mozer, reporting the incident to internal and external stakeholders, and holding myself accountable. Now, after reading the paper, I know that I need to learn the leadership skills that will instill a corporate culture that has a strong value system and a reward system that promotes compliance with desired actions.

In conclusion, these are five questions regarding leadership that I had before reading the Leadership Movement paper and the answers I've gleaned after reading the material:

Question: Who is responsible for corporate malfeasance?

Answer: Certainly, the person who has violated the law will be held accountable for his or her actions. In addition, it appears that any employee in an organization has the responsibility to disclose noncompliance and will be held just as accountable as the person who has violated policies and laws, particularly if that person is an executive who is expected to do something about the situation.

Question: Why does noncompliance occur?

Answer: Cultures that tolerate small excesses, cut corners and sanction gray areas lay the foundation for increasing abuse. Inaction is a breeding ground that fosters undesirable values that will inevitably cross the line of corporate norms. This is why companies need to have a zero tolerance policy for conduct that is not in compliance with company policies and/or legal regulations.

Question: What should an executive do upon discovering compliance issues?

Answer: An executive needs to dismiss the offending employee, conduct a full internal investigation, and engage in full disclosure with relevant company executives, legal staff and board members. The executive will also need to notify relevant external parties and promise full cooperation. The leader must acknowledge responsibility, express remorse and take corrective actions to make sure the situation does not happen again.

Question: Why is immediate action so important in issues involving noncompliance?

Answer: The executive needs to take immediate action so that additional damage does not occur and so that the executive and his team are not perceived as participants in a cover up. The faster the company acts, the better it can protect its image which could result in a loss of shareholder value and the loss of customer trust.

Question: Do companies really profit from questionable ethics and breaking the law?

Answer: Evidence in the case suggests that the gains are few and the costs will quickly dwarf any profit. In Salomon's instance, it received only a three percent gain from its improper Warburg bid. but, the costs were extraordinary in terms of settlement fines, lost trades, loss in market capitalization, and lost customers. If it wasn't for Buffet's quick turnaround strategy with the Federal Reserve, the company could have been forced out of business.